Raising capital is a step that every startup faces. When a business is brand new, the question of how to get money must be addressed. If you intend to launch a business that needs significant capital expenditure, such as a retail business or a company that employs several other people, then you won’t get far without initial funding.
Small businesses and startups must search for capital in a number of unconventional ways, as many do not have the size to issue valuable bonds or trade stocks and lack history with banks. Every investor has pro’s and con’s, and it is best to know what ways will work best for your business.
Friends or family investors:
Going to friends or family members can be the first point of contact to raise capital for your business. This is often a stage of funding that comes early in the process of getting a company’s operations off the ground. Investments from family and friends usually come in the form of loans, which you can arrange to pay back. A benefit from the investor’s perspective is that it could be considered less risky as there’s no mystery about the founders or their history. However, bringing issues of money into personal relationships can cause difficulties. It’s important to ensure that documents such as a formal business plan and legal agreements are drawn up professionally and to be transparent about expectations surrounding the investment.
Angel investors refer to wealthy individuals who enjoy helping entrepreneurs in their business ventures. They can be important to a new startup, investing their money in exchange for a share or part ownership in the business as an equity investment. However, they can also provide loan investments in the same way as family and friend investors. As angel investment is high risk and high return, most informal funders require a guaranteed high return on investment. This requires a small business to provide a thorough business plan for considering investors.
One of the most popular forms of startup funding is through venture capital. These are wealthy investors that support small businesses and startups by providing them with capital to grow and expand. Unlike family or friend investors, venture capitalists are generally equity investors with the expectation of a stake in the business. While they can be a great way to raise capital, they are often one of the hardest as these funds are typically looking for startups with high growth potential. It can also be about more than just return, as some venture capital firms have their own specialist areas and will look for founders or businesses they can add value to.